Friday, January 13,
2006

You
really can't top credit-card issuers when it comes to creative marketing. The latest twist from the Land of Debt is a card that ostensibly helps you build your
savings. "One by American Express" automatically deposits 1 percent of every purchase you make into a savings account. There's no minimum balance required in the
savings account, which offers an APR of 3.5 percent. At the moment, AmEx is offering a $25 kicker into the savings account with the first purchase on the
card.

"With One from American Express, your savings can grow effortlessly and automatically," the company's
Web site crows. "Use your savings for anything from a college fund to a great family
vacation -- the money is yours to spend as you like."

Gee, thanks, AmEx. But to borrow a line from Virgil, beware banks bearing gifts.
Here's what you'll find inside this Trojan horse:

A year after you start using the card, AmEx charges an annual fee of $35. So,
you must spend at least $3,500 on the card to break even, since 1 percent of $3,500 is $35 (you'll earn a buck and change in interest on the $35.)

Pay late
just once, and you'll ring up a late fee of $29.

The card's APR ranges from 13.24 percent to 15.24 percent. Miss the due date three times, and the APR soars
to nearly 22 percent.

Now, let's say you carry a $3,400 balance for a year. That's $450 to $500 in interest.

"Balance
carriers should understand that earning interest at 3.5 percent is not worth buying pizza at 15 percent -- do the math," says Ed Mierzwinski, consumer advocate
with the National Association of
State Public Interest Research Groups (PIRG).

Good Debt vs. Bad Debt

The math is simple, but
the psychology is not. The One card and other cash-back programs are sneak attacks on the cognitive dissonance debt causes. Cognitive dissonance theory, which you
may recall from Psych 101, was developed by social psychologist Leon Festinger in the 1950s. It suggests the human psyche gets perturbed when it has to retain
contradictory beliefs or values. The unpleasant "dissonance" motivates a person to change his knowledge, attitude, or behavior.

For instance, most
consumers who carry revolving credit-card balances have an inkling that they're wasting buckets of money in interest charges, and this contradicts their desire to
grow wealthy. According to the theory, to manage this dissonance, they do one of the following:

Change the behavior involved in the
dissonance -- i.e., pay off the
debt.

Forget or reduce the importance of the cognitions that contradict each other -- i.e., convince themselves that everyone has credit-card debt, it's
part of modern economic life, and they'll pay it off as soon as they get a raise.

The murky message of
reward marketing dates back to the mid-1980s with the launch of the Discover card, according to Professor Robert Manning, a Finance Professor at
the Rochester Institute of Technology and author of Credit Card Nation (Basic Books).

"[Marketers] recast the role of
credit cards as something positive," Manning explains. "It's part of the cultural confusion the industry has created: You could spend and invariably go into debt,
but if you were truly moral and
virtuous, you would avoid that temptation -- and be the one who takes advantage of these offers by getting free gifts."

Historically, cultural beliefs have differentiated good debt from bad debt. Things like mortgages and college loans are traditionally considered good debt,
because they help people advance economically over the long term. Things like using your credit card to buy the Matsushita 103-inch plasma screen unveiled at the
Consumer Electronics Show this month are considered bad debt, because this tends to inhibit economic progress over time. (But if you install one in your house,
I'll be there with chips and dip for the Super Bowl.) In any case, as Manning points out, programs like the One card are "recasting the notion of what is
good debt."

Goosing Spending with Plastic

Now before you start flaming me with e-mails
suggesting people have enough brains to recognize a
cheap marketing ploy when they see one, consider a study on the use of plastic. Two researchers at the Massachusetts Institute of Technology decided to test the
old adage that people become spendthrifts when they pay for stuff with credit cards. They wanted to figure out how much the use of a credit card inflates our
willingness to spend.

The researchers offered three items to participants: A pair of tickets to the last regular season game
between the Boston Celtics and the Miami Heat, which was sold out; tickets to a regular-season baseball game between the Boston Red Sox and the Toronto Blue Jays;
and a pair of team banners (Celtics and Red Sox). No market values were provided for any of the three prizes.

Participants bid on
the items in a sealed-bid auction. When they arrived to bid, some people were handed an instruction sheet that said payment was required in cash; others received
a sheet stipulating payment by
credit card. Everyone was told payment would have to be made the following day by 5pm.

According to the research report published
in Marketing Letters, participants told they could pay with credit bid up to 100 percent higher than people who intended to pay with cash. Which is exactly the
kind of purse-string loosening the credit-card marketers dream about when they devise gimmicks that give you the illusion of saving money "effortlessly and
automatically." Is it any surprise that the Federal Reserve reported on Jan. 9 a $335 million rise in credit-card debt in November, up a half percent on an
annualized basis?

Basking in a Virtuous Glow

Frankly, I'm thinking about getting a One card,
because I've been saving up for a while to replace our used car. I figure I'll charge $8,000 on the One card (which has no preset spending limit) and pay in full
at the end of the month.

AmEx
will deposit $80 in my savings account and pay $27.80 on the money (the $25 bonus and $2.80 in interest) -- a sweet 34.75 percent guaranteed return on the
deposit. Then I'll close the account at the end of the year, before I get charged the second-year annual fee.

And most rewarding of
all, I'll bask in the virtuous glow of taking free money from a credit-card company and spending it as I like.